ECB: Market impact from tapering - Westpac

Tim Riddell, Research Analyst at Westpac, notes that tapering (from EUR60bn to EUR 30bn) was announced (rather than held over to Dec.) by ECB with a longer duration (until at least Sept.) than some in the market had looked for.

Key Quotes

“Additionally, the reinvestment of maturing principals within APP and official rates would be maintained for “an extended period” and again longer than markets had expected.”

“The statement was seen as underscoring the relatively dovish and cautious stance of the ECB, taking EUR/USD from 1.1815 to 1.1750 prior to the Press conference and bringing 10yr Bund yields back to 0.44% (from 0.475%). Although these moves stabilised during the Press conference, the declines in EUR and easing of yields continued once the Press conference ended.”

“Statement

• The main debate prior to the ECB’s Press Release today was whether the terms of the 2018 tapering might be delayed until the Dec. 14^th General Council meeting if the logistics of the tapering still needed to be agreed upon.

• The announcement of the tapering and the stressing that accommodation would continue well beyond the end of this tapering affirmed the gradual and cautious approach of ECB. This may suppress hawks in the markets, but the details were within the range of markets expectations. One aspect that may have provided some surprise was the ECB’s cautious tone and the confirming that maturing principal would be re-invested – they are most definitely not moving to a double tapering any time soon.”

“Tapering 

Although there was speculation that the tapering might not be fully detailed until their Dec 14^th meeting, the details were much as had been “socialised” in the markets.

• APP cut from EUR60bn to 30bn as of Jan 2018 until end Sep 2018
• APP can be extended or increased if financial conditions become inconsistent 
  (a standard statement)
• Maturing principal payments will be reinvested for an extended period (after net APP)
• Additionally the ECB will continue refinancing operations at least until the end of 2019”

“Press Conference

Outlook

Draghi outlined the ECB’s more positive profile for both global and Eurozone prospects whilst maintaining their balanced (if more positive than before 1H’17) risk profile.

Foreign Exchange

Within the negative risks, he notably mentioned foreign exchange, underscoring the impression that moves in EUR/USD were perceived as unhelpful. Although this level has not been explicitly mentioned by ECB, in the previous Press Conference Draghi stressed that the latest ECB staff projections were based upon EUR/USD at 1.18.

Consensus Decision

Although Draghi stated that the decision on tapering was not unanimous, he stressed that the Council members were positive with a broad consensus (a normal stance for ECB).

Inflation

Draghi also commented that headline inflation was due to abate into year end and that very moderate core inflation has yet to show a convincing uptrend.

Lack of structural reforms

A recurring theme over the past two years has been the lack of other measures to assist the ECB’s accommodation and so, without necessary structural reforms within Eurozone, the ECB will need to remain highly accommodative whilst the recovery (even if noted to be sound) remains at risk and is not self-sustaining.

Details of tapering and reinvesting

In response to questioning, Draghi stated that the ECB will publish the details of their actions and reinvestments on their website, but (obviously) not the precise bonds/assets to be bought/reinvested.

This will occur from 6th Nov 2018 on a monthly basis.

“Key Conclusions for Markets

• 9-month period of further APP (halved to EUR30bn) rather than scaled over 6-months
• (implying APP terminal level of around EUR4.8trn rather than EUR4.7trn, see graph above)
• The explicit extended period of reinvestment and unchanged official rates post APP tapering
• Reinvestment will be more explicitly detailed on a monthly basis
• FX was explicitly referred to as a potential negative risk
• Core inflation is not in a convincing uptrend”

“Market Reactions

• EUR unwound the rebounds seen through this week. Despite stabilising during the Press conference, EUR (notably against USD) weakening (towards 1.1700-10) resumed once the Press conference ended.
• Rates eased with potential for ECB official rate moves in 2018 being mostly unwound, Bund yields slipping between -2bps to 4bps (2yr -0.73%, 10yr +0.44%) and intra-Eurozone 10yr spreads (also impacted by the passing of Italian election reform and positive Catalonia/Spain news) narrowing up to 6.5bps.
• Stocks also extended earlier gains (again with Spain and Italy leading those gains).”